'The Mortgage Renewal' - Higher Interest Rates Will Affect This, Too

With all the focus on Buyer's affordability for a new mortgage, it’s just as important for me to talk about the impact of higher interest rates when you need to renew your existing mortgage. As a GTA homeowner, you could very well find yourself paying hundreds of dollars more a month and you need to consider ways to prepare for the coming increase. Do you need to think about paying down other forms of debt to minimize your exposure to these rising interest rates? Yes, absolutely. 

Data analysis shows that many people renewing fixed-rate mortgages under current interest rates could be paying as much as $1,000 more a month.

For example, someone, who bought a home, in the GTA, at the average price of $790,000 in 2019, paid the minimum down payment and who got the best possible rate (2.59 per cent) for a 3-year mortgage, would be paying $3,317 a month during that term. If they renewed for another 3-year period today, their interest rate would nearly double to 5.14 per cent, for a payment of $4,209 – a 27 % increase. 

The picture is a bit better for people with expiring 5-year mortgages renewing today under the same parameters and that average buyer would pay $676 more a month based on average GTA prices 5 years ago. However, I know that many buyers were already stretching themselves to the max just to be able to own their home and any additional strain could have consequences.

So the questions are: Where is this extra $1,000+ a month going to come from? And, why wait until the mortgage becomes due to investiate this? You don't want to be in a panic and not know what to do. 

Many homeowners who have renewals coming up, in the next year or two, haven’t paid much attention to this looming financial hit. Instead, they're preoccupied by the immediate impact that rising interest rates have had on their home equity and other lines of credit.

If you have a bit of time before having to renew, I strongly suggest you plan for how you’ll manage a possible 4-figure+ housing-expense increase.

The financial planners, I've talked to, are advising anyone in this situation to increase their mortgage payments now so they have time to adjust, to a new lifestyle, with less disposable income. Or to consider aggressively attacking other forms of their debt. They seriously recommend: start preparing now, find out what your payment could be and then look through your budget to see where you can cut discretionary spending.   

The rapid changes in interest rates could spell the end of the pandemic-era shift in savings, where we cumulatively amassed billions during a period of low spending during the COVID lock-downs. It’s not just homeowners facing pressure at this time – those who rent are also dealing with inflated monthly payments.

A lot of people have seen their investments fall 10, 15 or 20 per cent this year depending on what they’re invested in. Some see it as more reason to focus now on debt repayment.  Many are especially nervous about the stock market and further interest rate increases.

Unfortunately, the people most negatively affected by this are younger homeowners in their 20s and 30s. At these ages, people carry some of their highest levels of debt, and will feel the brunt of rising interest rates more because of their relatively higher mortgage balances.

There are few courses of action for people carrying these large mortgages, so I'd say it’s definitely worth talking to a Mortgage Broker about whether an early renewal – locking in the current rate in a rising rate environment – on your mortgage term, is worth it. You'd be surprised how much you could save over the long term.

Since interest rate trends are hard to predict, the Bank of Canada will likely keep hiking them (hopefully not as aggressively) as inflation remains high. And there’s no definitive answer as to when this will end. A recession, now expected in 2023, could change that, but only if inflation also drops.

My crystal ball is no better than anyone else’s, and … we are definitely in a new housing and debt environment. Please consider contacting your Mortgage Broker to talk about this now, rather than later. And if I can connect you with one of my own trusted, expert Mortgage Advisors, please email  (nancy@nancybiderman.com) or call me directly (416-721-6041). You know I always want you to have the absolute best advice now and for your future.